Global Manufacturing Engine Decelerates

The much awaited European Union summit yesterday provided little in terms of concrete measures to tackle the worsening debt crisis in the Eurozone. However, leaders showed their willingness to keep Greece in the Euro bloc. Meanwhile, manufacturing PMI data released earlier today, across Europe and China, have been weak and weighed on high yield currencies. In the UK, data just released has confirmed recession in Britain, with sequential contraction downwardly revised to 0.3% and has raised the probability of additional QE. Across the Atlantic, durable goods orders and weekly jobless claims will garner some market interest.

Pound Sterling – UK Markets

Sterling has weakened against the US Dollar this morning on waning risk appetite following weak global manufacturing data. Additionally, data just released confirmed that the UK economy slipped into a recession. However, weak manufacturing activity across Europe seems to have outweighed the dismal domestic economic scenario and has prompted traders to favour the Pound versus the Euro. In yesterday’s trading session, the Pound slipped against the US Dollar after data revealed an unexpected drop in UK retail sales for April, spurring market speculation of further easing. Although only one of the nine committee members voted for more QE, minutes of the BoE’s last rate setting meeting indicated that the decision for several others was “finely balanced”. Moreover, BoE Deputy Governor, Charlie Bean, kept QE hopes alive by indicating that the central bank may need to resume asset buying, if economic conditions deteriorate sharply.

US Dollar – US Markets

This morning, the US Dollar has maintained yesterday’s gains against the Euro and Sterling. The weakness in Chinese and European manufacturing sector, coupled with Merkel’s comments over jointly issued common bonds, dented market sentiment. Yesterday, a flight to safety triggered a rise in the US Dollar against the majors, as traders remained cautious ahead of the EU summit. Moreover, positive data on the housing front eased worries surrounding US economic growth. Data revealed a more-than-expected rise in new home sales for April and an improvement in the house price index for March. However, weakness in the employment market continues to keep QE3 expectations alive. Minneapolis Fed President, Narayana Kocherlakota, opined that the central bank likely cannot mend all the damage done to the US job market due to the credit crisis. Against this backdrop, today’s initial jobless claims data is expected to garner some market interest. However, durable goods orders, due later today, is expected to hog the spotlight as it is likely to rebound for April and signal an improvement in US economic outlook.

Euro – European Markets

Data out earlier today, indicated a more than expected contraction in the German, French and Eurozone manufacturing sector. It has intensified market fears and weighed heavily on the Euro against the majors. German business climate index also weakened for May, highlighting the vulnerability of the German economy to external shocks. Additionally, subdued sentiment, following the EU summit, led the Euro to extend its southward journey this morning. Yesterday’s EU leaders meeting proved to be a lackluster event with no concrete solution to the region’s debt crisis and continued German opposition to the introduction of Eurobonds. However, leaders expressed their desire to keep Greece in the bloc, if it adheres to the austerity measures. Elsewhere in the periphery, Spain’s Prime Minister, yesterday warned that the nation could no longer continue with its current high borrowing rates and urged a joint European help. With no other major catalyst for today’s session, we expect the Euro to remain under pressure and will respond to any shift in risk sentiment, following the release of macro indicators across the Atlantic.

Other Currencies – Highlights

The Japanese Yen has climbed against its major counterparts in today’s session as investors turned risk averse after manufacturing activity across major global economies continued to contract for May. Moreover, the outcome of the EU summit in Brussels failed to offer much to calm market fears surrounding the Eurozone debt crisis. In yesterday’s trading session, the Japanese Yen posted decent gains against the majors after the Bank of Japan (BoJ) refrained from adding further monetary stimulus. Additionally, the central bank kept its key overnight lending rate unchanged between 0.0 and 0.1 percent, in line with market expectations. Meanwhile, the BoJ, in its monthly report, indicated that the economy is moving towards a recovery. The consumer price inflation data, due tomorrow, is likely to be closely eyed against the backdrop of the central bank’s report.